Better infrastructure investment numbers mask weakness in other areas of the economy.

By Nathaniel Taplin

China’s impressive infrastructure, which helps drive demand for everything from copper wires to Caterpillar excavators, is a source of pride for party apparatchiks and an obsession for commodities traders.The latter are likely to celebrate Tuesday figures showing a sharp rebound in investment in things like roads and railways in early 2017. But investors should be warned: the uptick isn’t likely to last, and it obscures broader weakness which could weigh on growth once it fades. First, the good news: China’s infrastructure investment rebounded sharply to 21% growth from a year earlier in January and February, up from just 11% in the fourth quarter of 2016, a four-year low.Yet excluding infrastructure, China’s annual investment growth rate actually dipped to just 5%, from 7% in the last quarter of 2016. Real estate and manufacturing investment both weakened, despite healthy land sales numbers—in line with fourth-quarter 2016 earnings hinting that profit growth for most sectors peaked in late 2016.For one particular infrastructure sector, power and utilities, the news was unequivocally bad: investment growth slowed to just 1%, the weakest showing since 2011. Higher coal prices and overcapacity have eroded power-sector margins: Copper is already feeling the pain, with the metal down 6% from its year-high set last month. The outlook isn't much brighter. While economic planners will try to avoid a sharp deceleration in spending ahead of a key Communist Party congress this fall, most infrastructure in China is funded locally, not centrally. And borrowing conditions for local governments have sharply deteriorated after Chinese bonds were pummeled by a market rout in December.

Workers unload coal at a railway coal-storage site in China in 2009. China’s newest round of infrastructure spending should boost commodities, but the uptick isn’t likely to last. Photo: ReutersYields on both official municipal bonds and those issued by off balance sheet municipal financing vehicles, which do most of the grunt work raising capital for infrastructure, have risen sharply since then. Net new off-balance-sheet bond financing by local governments totaled just 80 billion yuan ($11.57 billion) from December to February, against 199 billion yuan in November alone, according to Wind Info. Yields on AA-rated municipal-financing vehicle debt are up nearly 200 basis points since mid November.With financing and raw material costs both heading skyward and central government support unlikely to step up significantly, the headwinds to a sustained pickup in infrastructure building look strong.Investors should consider themselves warned: if industrial growth in the rest of the world slows as well, or the Chinese housing market seriously stumbles, commodities and infrastructure-linked shares will feel the pain.

Inflection Point For The U.S. Economy As This Recession Trigger Now Put In Motion

by: Atle Willems

Summary

- Towards the end of QE3, the money-creating burden was once again handed to the Banks.- Banks reacted positively and lending growth expanded quickly.- But in recent weeks, bank lending has actually contracted pulling the money supply growth rate into negative territory.- Typically, these developments signal not only a looming GDP recession, but also increased probability of an economic crisis and a stock market crash.- Following years of artificial growth, the U.S. economy now therefore appears to be at a major inflection point.

During the QE3 taper, the baton was handed from the Federal Reserve to the banks to put their unfathomable $2.8 trillion in mostly excess reserves "to work" and once again become the chief money creators. Banks, eager to earn higher returns than the 25 basis points offered on their reserves parked in Fed vaults, did what was expected of them and ramped up lending growth to around 8% within months.

But in late October last year, bank lending growth started declining. It dropped modestly at first, but then started to tank in mid-December. According to the most recent data, the y/y growth rate has now dropped to 4.6%, the lowest reported since June 2014.

Why is this of such great importance? Because the reduction in lending growth will negatively affect the money supply growth rate. Changes in the money supply growth rate are economically important for many reasons, the most prominent being how they affect interest rates and relative prices, and the misdirection of resources that follow.

That is, when interest rates and prices are disturbed, i.e. altered compared to what the level of interest rates and prices would be absent these changes in the money supply, economic imbalances build up as a portion of resources are allocated elsewhere compared to where they would have been allocated absent these disturbances. Essentially, these alterations to interest rates and prices create the business cycle. An expansion of the money supply growth rate fuels inflationary booms, while declines trigger very real busts. In this sense, the business cycle is a reflection of the money cycle.

During the boom phase, undertakings that would not have been possible absent the credit expansion see the light of day and gradually expand. But this expansion is dependent on further credit growth and will hence collapse when the credit flow dries up. Effectively, many undertakings become addicted to further credit expansion during the boom phase, a state which is untenable. Why? because economic expansions are only sustainable when they are based on prior saving. The issuance of new money (which is what actually takes place when banks extend loans) is no substitute for saving.

The risk is therefore that the decline in lending growth depicted in the chart above will trigger an economic reaction that brings about sharp corrections in many asset prices, including stock market prices. Since GDP growth is largely a function of money supply growth, GDP will also suffer from a decline in lending growth. The reduction in lending growth in recent months therefore may help explain why the Atlanta Fed GDPNow indicator has declined sharply in recent weeks.

The faster the money supply growth rate falls following a period of expansion, the quicker an economic reaction is triggered. Outright contraction in bank lending is therefore a major warning sign that a reaction of some sort (referred to as a "shock" in some circles) might be approaching.

Looking at a shorter-term growth rate than the y/y growth rate depicted above, it becomes clear that lending growth on a rolling quarter (13 weeks annualised) basis is now in fact negative, i.e. lending is actually contracting.

The chart shows that lending on this basis has now contracted for four consecutive weeks. To put this in context, the last time this happened, ignoring the aftermath of the previous banking crisis, was in the run-up to the Lehman collapse in September 2008. In fact, it is highly unusual that lending ever contracts on a 13-week basis.

But when it does, it tends to precede or occur during an economic crisis of some sort. Based on data since 1995, the previous contractions in lending was in 1999 (towards the end of the dotcom bubble), 2001 and 2002 (recession), and eight consecutive weeks ending in early August 2008 (September 2008 banking crisis). The point is that a contraction in lending as we are seeing now is often associated with economic problems.

The highly anticipated Fed rate hike this week could hence hardly be timed more poorly as higher interest rates by itself will exert further downward pressure on lending growth.

Recent credit developments are therefore a major obstacle to a Fed rate hike which is why there is at least a small chance it will not raise rates.

There can be little doubt that the U.S. economy is now at or near a major inflection point. This artificial recovery (artificial because it has been driven by monetary inflation and a relative reduction in savings more than anything else) is now in its ninth year. At the same time, the stock market is valued for perfection.

The crux of the problems is that lending is now contracting while the economy at large and most asset prices depend on further injections of new money and low interest rates. If U.S. banks continue to reduce lending, it is only a matter of time before another major economic crisis hits the U.S. as the money supply growth rate has now also dived into negative territory.

The question then becomes not if but when and how the Fed will once again intervene as banks, at least for now, appear to be handing the baton back to the Fed. Chances are however that the Fed will once again react too late to avert another crisis.

Oil and oil stocks are out of favor – but not on their way to oblivion. Investors should wait for buying opportunities instead of selling off.

By Michael Kahn

Getty Images

There’s no doubt about it: Crude oil was trounced last week and its three-month period of stability was clearly broken to the downside. The question is whether this is the start of yet another collapse in prices or merely a market adjustment within a new normal.

Based on the charts, it looks to be the latter – that is, a decline within the larger trading range between $40 and $55 per barrel, which has arguably contained the market for the past two years.

First, I have to explain why I think $40 is the low end and not the $26-$27 area seen a little more than a year ago (see Chart 1). If we construct the range using absolute highs and lows, we might get something a bit more mathematically pure yet far less useful. Rather than dwell on creating a pretty picture, I’d rather look at price levels that actually got bulls or bears to step up their game.

Chart 1

And that points to potential buying opportunities ahead. I just don’t think they are there right now. We should wait until the bottom of the range and technical support are reached.

Some may argue that the trend from early 2016 is still unbroken to the upside, and indeed, we can draw a trendline to support that idea. I counter by saying the required series of higher highs and higher lows is not really there. Most of last year was actually spent churning about, even with November’s big rally on news that OPEC was cutting production by 1.2 million barrels a day, causing the prices of oil and oil stocks to jump.

In other words, the past year of activity resulted in more of a trading range than a rising trend.

Last week, oil dropped $4.81 to 48.39 per barrel -- its lowest weekly close since the end of November. In the news was the U.S. Energy Information Administration reporting a ninth consecutive rise in crude inventories. This came as Saudi Arabia’s energy minister said the OPEC agreement was not making as quick an impact as initially anticipated.

Of course, oil can bounce anytime, especially since it sits, arguably, on the trendline as well as the 200-day moving average. The latter is not usually a major analytical tool for crude oil, but the market did bounce off it twice last year. If oil-trading bulls believe it was meaningful before, then they may buy now.

Still, the big picture, as seen in the long-term chart, remains a trading range (see Chart 2).

Chart 2

The same is true for oil and gas stocks, although I think we have to give a lot of credit to the broader stock market for preventing a short-term breakdown from turning into a bigger problema.

In a February column, I called energy stocks undervalued and ready for breakouts. I saw a big bullish reversal in the Energy Select Sector SPDR exchange-traded fund (ticker: XLE) at an important support level, which failed to follow through with much upside (see Chart 3). Mea culpa – but to be fair, I did point out that a trendline needed to break to the upside before the buying should begin.

Chart 3

That breakout never occurred, and the ETF continued to slide into last week’s lows. Even worse, the trendline from the January 2016 low, which defined a much better rising trend than that for crude itself, broke to the downside, as did key horizontal chart support.

In the past 13 weeks, the ETF gave up nearly all of the relative gains it had made against the Standard & Poor’s 500 index since January 2016. That’s some serious underperformance.

Along with support breaks, we can add a 200-day average breakdown, which does have meaning in the stock market. The potential for more losses is very real.

Still, measures of “cumulative volume” and “accumulation” suggest that investors are not selling their shares in a panic. Instead, it seems to be more of a buyers’ strike. The rising tide in the broad market seems to be supporting energy, even though that sector seems so weak. That may be outweighing the supply issues seen in crude oil. Even a lagging sector can move higher if the broad market is strong enough.

The bottom line is that both oil and oil stocks are out of favor right now, but the charts do not offer enough evidence to say that will bring them down to new lows. It may take a while to play out, but it looks like the best strategy for investors is to wait for buying opportunities to emerge rather than purging portfolios of oil and oil stocks completely or selling them short.

Sean Hannity reminds us that the paranoid style in politics is alive and well today.

By Bret Stephens

Steve Bannon and Recep Tayyip Erdogan. Photo: Zuma Press

In September 1980 the Turkish military mounted a coup, arrested half a million people, sentenced more than 500 of them to death, and executed 50. The military left power two years later, having imposed a constitution that further entrenched its prerogatives. For decades, the generals’ veto power in Ankara formed the legal spine of what Turks call derin devlet, or deep state—the self-appointed defenders of the national interest, nobody above them, nothing beneath them. As a descriptor for Turkish reality this had a lot going for it, except for this: There was nothing deep about the deep state. Everyone knew who called the shots. Everyone understood the nature of the regime. Undemocratic it might have been. Shadowy it was not.What once went in Turkey—and still goes in Egypt and Pakistan—has now come to America, or so we’re told. “Deep-state Obama holdovers embedded like barnacles in the federal bureaucracy are hellbent on destroying President Trump, ” Sean Hannity opined last week. “It’s time for the Trump administration to purge these saboteurs.”Mr. Hannity has suggested that the CIA has conducted “false flag” cyberattacks against American targets while pretending the attacks emanate from Russia. The Daily Mail claims Barack Obama intends to convert his new home into “the nerve center of the mounting insurgency against his successor.” A Breitbart author warns: “The Deep State never sleeps. It’s always doing something. Something, that is, to undermine the Trump administration.”The idea of a deep state isn’t new to U.S. politics. Nor is it particularly right-wing: The left has its own lunatic theories when it comes to the workings of the CIA, NSA or NSC, which explains why Mr. Hannity and Julian Assange are now fellow travelers. But as the Turkish example reminds us, whatever else exists in Washington, it isn’t a deep state. When Mr. Trump demanded the resignations of 46 U.S. attorneys, they all left, except for Manhattan’s Preet Bharara, who asked for a firing and got it. The CIA is run by a Trump appointee, and the only generals in charge of federal departments are the ones the president nominated to their positions. The GOP establishment has rolled over for the new president. As for the “corporatist, globalist media” that Steve Bannon rails against, it also includes Fox News.Ordinarily it should go without saying that Washington is not Ankara, that the CIA and FBI are staffed by patriots, that a flurry of invidious leaks is not tantamount to tanks in the streets, that complex institutional networks are not conspiracies in government, and that the predictable reflexes of bureaucracies to defend their turf are not acts of sedition. Neither Dilbert nor his creator is a member of the Resistance. But, to borrow a phrase, this is no ordinary time.This is paranoid time. Specifically, we are again in territory best identified by Richard Hofstadter in “The Paranoid Style in American Politics.” It may be one of the more overworked essays in academic history, but see for yourself whether Hofstadter’s description of the “modern right-wing” applies today:“America has been largely taken away from them and their kind, though they are determined to try to repossess it and to prevent the final destructive act of subversion. The old American virtues have already been eaten away by cosmopolitans and intellectuals; the old competitive capitalism has been gradually undermined by socialistic and communistic schemers; the old national security and independence have been destroyed by treasonous plots, having as their most powerful agents not merely outsiders and foreigners as of old but major statesman who are at the very centers of American power.”This was written in 1963.Hofstadter took it as a given that the purveyor of paranoid conspiracy theories is himself a believer in them; that Joe McCarthy was, himself, McCarthyite. But is that true of Mr. Trump, Mr. Bannon or aides such as Sean Spicer, who on Monday rolled back the president’s accusation that Mr. Obama had personally ordered the wiretapping of Trump Tower?The paranoid style can be evidence of irrationalism bordering on mental illness. It can also be a form of a cunning instrumentalism to destroy your political opponents by stoking hysterical fears in your supporters. Turkish President Recep Tayyip Erdogan is a master of the latter method. What about Mr. Trump?We may never know the answer. What we know is that after eight weeks of the Trump administration we have talk from the most popular conservative media about the need for “purges” to cleanse what Mr. Bannon calls “the administrative state.” Conservatives used to understand the ideological provenance of words and the consequences that flow from treating political differences as mortal threats to the state. Too bad too many intelligent conservatives gave up worrying about the use of language sometime last year. They will come to regret what they’ve allowed, perhaps only when they, too, become its victims.

BISHKEK – The series of terrorist attacks that have struck Turkey over the last year are sending the country – once viewed as a democratic, secular model for the Middle East – into a death spiral at the very moment when its people are to vote on a new constitution next month. Tourism – which previously accounted for more than 10% of Turkey’s GDP – is withering, and foreign direct investment is set to slow considerably. These outcomes will reinforce each other, producing a vicious cycle that will be difficult to halt.

Turkey’s government-controlled media and large swaths of the population see the nefarious hand of the West in the country’s unraveling. Observers often blame Turkey’s deepening plight on its inability to reconcile traditional Islam and modernizing Western tendencies, as well as on external events, such as the conflict in Syria. But decisions by Turkish President Recep Tayyip Erdoğan have also contributed to Turkey’s vulnerability to terrorism.

Erdoğan’s first such decision, motivated by his desire to see Syrian President Bashar al-Assad’s regime collapse, was to allow fighters, including recruits for the Islamic State, to cross Turkey’s southern border into Syria relatively freely. He failed to recognize fully the danger these fighters posed to Turkey’s own security, particularly as many of them joined Islamist-affiliated groups that are as hostile to Turkey as they are to Assad.

Erdoğan’s second fateful decision was to re-launch the on-again, off-again civil war with Turkey’s Kurdish population. In the early years of his presidency, Erdoğan reached out to the Kurds and managed, more or less, to halt active hostilities.

But, in June 2015, Erdoğan’s Justice and Development Party (AKP) lost its parliamentary majority, prompting the president to resume open hostilities with the Kurdistan Workers Party (PKK) rebels. Erdoğan’s gambit allowed the AKP to retake a parliamentary majority in a snap election that November, but at the cost of reopening the Pandora’s box of civil war.

Despite these two decisions, it might have been possible for the Turkish security forces to continue protecting the country from both Islamist and Kurdish terrorism. But a third decision ruled that out: Erdoğan chose to break with Fethullah Gülen, the expatriate cleric whose influential followers – the so-called Hizmet movement – had for many years been among Erdoğan’s most important allies.

Over the course of roughly six years, the Gülenists had helped Erdoğan to oust military and police cadres (among many other public-sector employees) who were loyal to Turkish secular and nationalist ideals, rather than to his own soft Islamism. But, in 2013, Erdoğan, suspecting that the Gülenists had begun plotting against him, began turning on them.

The short-lived coup attempt last July spurred a vengeful Erdoğan to organize a massive purge of the military and security services. While it certainly makes sense for a government to prosecute those who have attempted to overthrow it, Erdoğan took matters significantly further, pursuing anyone with the slightest potential connection to Gülen. In the process, he severely weakened the capacity of Turkey’s police and military.

At a moment when threats from Islamist and Kurdish groups were intensifying, that was the last thing Turkey needed. Perhaps Erdoğan should have recalled Joseph Stalin’s purge of the Red Army’s officer corps in the late 1930s, which left the Soviet Union almost defenseless, opening the way for Adolf Hitler to attack in 1941.

Turkey is now fully under the political control of a single individual – and incapable of dealing with the multiple crises that it faces. Even in the best-case scenario, Turkey will be severely weakened, no longer capable of sustaining the regional leadership role that it played for nearly a century. In the worst-case scenario, Turkey’s economy will collapse, sending huge numbers of refugees – including Syrians and others currently in Turkey, as well as Turks themselves – to Western Europe.

Not everyone is distressed by Turkey’s misfortune. Russian President Vladimir Putin is probably more than pleased with the country’s transformation. In Putin’s worldview, the most dangerous countries are successful democracies allied with the West. Turkey used to be precisely that: a democratic and reasonably prosperous country and a longtime NATO member, moving swiftly to deepen its ties with the West.

Now, Turkey is becoming an economically weakened autocracy, wracked by terrorism and unable to defend itself, much less to help NATO project power. This is a dream come true for Putin. (It is also good news for Russia’s ally Iran, which can only welcome the destabilization of its main non-Arab Sunni rival in the region.) If Turkey’s downward spiral generates a new wave of refugees bound for Europe, further destabilizing the European Union, all the better.

This is not to say that Putin has planned Turkey’s downfall. He didn’t have to. Leaders like Erdoğan easily fall for Putin’s brand of modern dictatorship, which relies on disinformation and the trappings of democracy to bolster the ruler’s personal power. All Putin has to offer is inspiration, and perhaps some advice from time to time.

Beyond Turkey, US President Donald Trump seems equally enamored of Putin. We shall see whether the United States – with its economic strength, relative geographical isolation, and strong institutions – is better protected than Turkey against the influence of Putin’s malign example.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.